The states originated as separate British colonies prior to Federation (in 1901). Their powers are protected by the Australian constitution, and Commonwealth legislation only applies to the states where permitted by the constitution. The territories, by contrast, are from a constitutional perspective directly subject to the Commonwealth government. The Australian Parliament has powers to legislate in the territories that it does not possess in the states.

Most of the territories are directly administered by the Commonwealth government, while three (the Northern Territory, the Australian Capital Territory and Norfolk Island) administer themselves. In the self-governing territories the Australian Parliament retains the full power to legislate, and can override laws made by the territorial institutions, which it has done on rare occasion. For the purposes of Australian (and joint Australia-New Zealand) intergovernmental bodies, the Northern Territory and the Australian Capital Territory are treated as a state.

Furthermore, the distribution of powers between the Commonwealth and the territories is different from that between the Commonwealth and the states. In the Northern Territory, the Commonwealth retains the power to directly administer uranium mining and Aboriginal lands, powers which it does not possess with respect to the states.

Each state has a Governor, appointed by the Queen, which by convention she does on the advice of the state Premier. The Administrators of the Northern Territory and of Norfolk Island are, by contrast, appointed by the Governor-General. The Australian Capital Territory has neither a Governor or Administrator, but the Governor-General exercises some powers in other exercised by the Governor of state or Administrator of a territory, such as the power to dissolve the Legislative Assembly.

Each state has a bicameral Parliament, patterned on the federal system, except Queensland, which abolished its upper house in 1922. The lower house is called the Legislative Assembly, except in South Australia and Tasmania, where it is called the House of Assembly. Tasmania is the only state to use proportional representation for elections to its lower house, all others elect members from single member constituencies, using the alternative vote. The upper house is called the Legislative Council, and is generally elected from multi-member constituencies using proportional representation. The three self-governing territories, the ACT, the Northern Territory and Norfolk Island, have unicameral Legislative Assemblies.

The head of government of each state is called the Premier, appointed by the state's Governor. In normal circumstances the Governor will appoint as Premier whoever leads the party or coalition which exercises control of the lower house (in the case of Queensland, the only house) of the state Parliament. However, in times of constitutional crisis, the Governor can appoint someone else as Premier. The head of government of a self-governing territory is called the Chief Minister, and likewise they are appointed by the territory's Administrator, in normal circumstances to whoever controls the territory's Legislative Assembly.